JUMBO GOLD INVESTMENT LTD. v. WARREN YUEN CHEONG LEUNG AND ANOTHER

FACV No. 9 of 1999

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 9 OF 1999 (CIVIL)

(ON APPEAL FROM CACV No. 113 OF 1998)

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(by Order of the Court of Appeal
to carry on proceedings dated the 25th day of May 1999)

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J U D G M E N T

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Mr Justice Litton PJ:

Introduction

1. This appeal concerns the sale and purchase of a property in Repulse Bay. Litigation has arisen yet once again over a requisition as to title.

2. The property in question is flat C6 on the 3rd floor of Block C Repulse Bay Mansions and car-parking space No. C6. Block C Repulse Bay Mansions is a 5-storeyed building erected over car ports. The building stands well over 35 feet in height. The land on which the building is erected is sub-section 4 of section A of RBL No. 168. By an agreement dated 30 August 1997 the appellants ("vendors") agreed to sell to the respondent ("purchaser") the property (which included a 2/25th undivided share of subsection 4 of section A RBL 168) for $26,800,000, completion to take place on 15 November 1997. Clause 7(a) of the agreement required the vendors to "give and prove good title" to the property and to produce the Crown Lease and other documents of title in accordance with section 13 of the Conveyancing and Property Ordinance, Cap. 219.

3. By letter dated 4 September 1997 the purchaser's solicitors raised a number of requisitions as to title. Of relevance to this appeal is the following:

"According to the restrictive covenant of the Crown Lease in respect of Rural Building Lot No. 168, no building erected on the lot shall exceed 35 feet except with the prior consent of the government. Please therefore prove to us that such restrictive covenant has been complied with."

4. There followed an exchange of letters between the solicitors. The vendors' solicitors' response to the requisition can be summarized as follows:

5. The purchaser's solicitors did not accept that these answers were sufficient to satisfy their requisition as to title. On 14 November 1997 they took out an originating summons under s.12 of the Conveyancing and Property Ordinance, asking the court to determine whether, by those replies, the vendors had "shown and proved a good title" to the property. This was heard by Yeung J. The judge approached the matter thus:

"In order to show and prove a good title, the [vendors] must establish beyond a reasonable doubt that there is no risk of the Government taking any enforcement action in respect of the covenant on the height restriction. If the [vendors] cannot so satisfy the court, the court will not force the title on the [purchaser]."

6. The judge concluded that, having regard to the history and background of the case, as known to the parties, there was no real risk of the government taking enforcement action for alleged breach of the covenant. He gave judgment in the vendors' favour.

7. The purchaser appealed. By its judgment of 17 March 1999 the Court of Appeal (Nazareth VP and Stock J, Liu JA dissenting) allowed the purchaser's appeal. Hence the vendors' appeal before us.

Background facts

8. Block C Repulse Bay Mansions stands on a subdivision carved out of a large piece of Crown land : RBL 168. The Crown lease for RBL 168 is dated 16 July 1928. The first lessee was The Hong Kong and Shanghai Hotels Ltd. The Crown lease contained a building covenant, but limited the number of houses to be erected on the lot to eight. It then went on to provide:

"And will not erect any buildings on the said piece or parcel of ground other than houses of a European type and the design of the exterior elevation and the dispositions thereof shall be subject to the special approval of [the Director of Public Works] and in no case may the height of any building erected on the said piece or parcel of ground exceed thirty five feet except with the consent of the Governor-in-Council ...."

9. Since the first grant, a number of subdivisions of RBL 168 have been made. Subsection 3 of section A was carved out and an apartment block of 5-storeys over car-ports, Block A Repulse Bay Mansions, was erected on this subdivision. The occupation permit for Block A is dated 28 April 1950. Subsection 1 of Section A was also carved out and Block B, of the same height and disposition as Block A, was erected. The occupation permit for Block B is dated 5 September 1951. Blocks A and B were developed by the same authorized architect and the same owners. Then, a little later, Block C was erected by the same owners, the occupation permit of which was issued in June 1955.

10. The owners retained part of the lot numbered as the Remaining Portion of RBL 168 (RBL 168 RP). In 1961 they applied to the government for a modification of the height restriction relating to RBL 168 RP. By a deed of variation dated 1 December 1961 in consideration of the payment of a premium the lease conditions were modified to enable a high-rise block (not exceeding 20-storeys over car-ports) to be erected on the Remaining Portion. Since then a high-rise block, Repulse Bay Towers, has been built on the site.

11. Two matters are worthy of note at this point:

12. In the Court of Appeal, Stock J was mistaken in relation to both points (1) and (2) above: Understandably, as counsel seemed mistaken as well. He thought that Block C, being six-storeyed, might have contravened the statutory height restriction from the start (if additional storeys had not been added later unlawfully). He also thought it significant that "the owners of Blocks A and B went to the trouble in 1961 of securing permission for development which otherwise would have been in breach of covenant" : In other words, the judge thought that the owners of Blocks A and B had, in 1961, retrospectively regularised the position and paid a premium to cure the breach, leaving Block C in continuing breach. He said:

"It seems to me that the very fact of the breach of the height restriction, taken together with the applications for modification of Blocks A and B, suggests that there may have been additions after 1955".

Neither conclusion reached by the judge is supported by the evidence. There never was any applications "for modification of Blocks A and B". There was an application for modification of Lot 168 RP, after the Ordinance was amended to enable domestic tower blocks to be built. If the owners of Block C were in breach of covenant, so were the owners of Blocks A and B.

13. Because the history of the development of RBL 168 goes so far back in time, it would be unreasonable to expect the parties to adduce clear evidence in that regard. There is however some material before the court to support the vendors' solicitors' contention that lease modifications were, in the 1940s and 1950s, done informally by correspondence. There is, for instance, a handwritten notification in the margin of a letter dated 26 July 1948 addressed to Messrs Deacons, solicitors, to the effect that an extension of time had been given for the Crown lessee to fulfill the building covenant relating RBL 168. That letter itself (written on behalf of the Colonial Secretary and copied to the Director of Public Works) refers to another letter ("my letter No. 37/3091/48 of the 16th July") where terms of modification had been proposed. Here, a modification of the building covenant in the lease was indeed done informally by correspondence.

14. In June 1957 the entire Block C was assigned by the developers to Lap Heng Co. Ltd. The vendors acquired the property from Lap Heng Co. Ltd in May 1973 and had, as far as the evidence goes, been in undisturbed possession since that time.

15. From the date when the construction of Block C was completed and the occupation permit issued (June 1955), to the date when the vendors agreed to sell the property (August 1997), a period of over 42 years, no suggestion has ever been made by anyone that the government in its capacity as lessor of subsection 4 of section A of RBL 168 might wish to "enforce" the height restriction contained in the Crown lease. As to what such "enforcement" might in reality mean, this will be looked at more closely later in this judgment.

16. Counsel for the purchaser had, apparently, submitted to the Court of Appeal that there was a real possibility that Block C, as originally built, had complied with the height restriction of 35 feet and that the occupation permit was issued on that basis : Some time later additional floors were then added unlawfully, either by the original developers or by subsequent owners. This suggestion found favour with Stock J, upon the mistaken view of the facts as referred to earlier.

17. This suggestion is totally without foundation and contrary to commonsense. To his credit, counsel for the purchaser did not pursue it before this Court.

Showing good title

18. In considering the question whether the vendors had, in answer to the purchaser's requisition, shown good title, the only rational basis upon which the parties could have proceeded was that plans had been submitted by the authorised architect in the 1950s for the construction of a 5-storeyed building (to be built over car-ports on the ground floor) and that the Building Ordinance Office of the Public Works Department had inspected the completed building before the Director issued the occupation permit. What inference can properly be drawn from these two facts? Counsel for the purchaser Mr Chong submits that the issuance of the occupation permit is of no significance: It only meant that the new building complied with the requirements of the Buildings Ordinance and was structurally safe; it said nothing about compliance by the owner with the Crown lease conditions. The occupation permit was, however, copied to the Superintendent of Crown Lands and Survey, and the Commissioner for Rating and Valuation. However limited the responsibilities of the Buildings Ordinance Office might have been with regard to the actual construction of the building, the Crown Lands and Survey Office was concerned with lease conditions. It was an office within the Public Works Department. As the Privy Council observed in Hang Wah Chong Investment Co. Ltd v. Attorney General [1981] HKLR 336 at 341:

"... the view expressed by Huggins JA ... that the Director of Public Works has many responsibilities besides those imposed by the Buildings Ordinance appears well established, one of these responsibilities being that of acting as the Crown's land agent ..."

19. It would seem very odd that the Director of Public Works (or perhaps more accurately the responsible officers of his department) in approving the plans and issuing the occupation permit did not know that Block C had exceeded the height limit of 35 feet in the Crown lease. Mr Chong's submission, on behalf of the purchaser, that the Director of Public Works was concerned simply with the statutory requirements of the Buildings Ordinance and nothing else is, on its face, somewhat unrealistic. Be that as it may, these matters were not explored in the trial court and the judge did not find as a fact that the Director had, in 1955, expressly waived or agreed to a modification of the lease condition, so this matter must rest at this point unresolved.

Enforcement action

20. The cardinal point put forward by the vendors' solicitors, in dealing with the requisition as to title, was not any surmise or conjecture as to what might have happened within the Director of Public Works' office in 1955, but this simple proposition : Was there a real risk that the government might take "enforcement action" in respect of any alleged breach of covenant now? This is how Yeung J dealt with the matter at trial.

21. It is common ground that the only "enforcement action" the government could possibly take is re-entry under the lease in respect of the entire piece of land upon which Block C is built : Exercisable by registering a memorial of re-entry under s.4 of the Government Rights (Re-entry and Vesting Remedies) Ordinance, Cap. 126, extinguishing the interest of every owner therein.

22. If the government, in its capacity as lessor, were dealing simply with the developer, that is one thing: The equitable considerations that would arise on a question of relief against forfeiture, under s.8(1)(b) of Cap. 126, would be decided by examining the respective conduct of the two immediate parties: The government as lessor and the developer as lessee. But where third parties have become involved, acquiring units in the building on the basis that permission to occupy that building for domestic purposes had been granted by the government and that Crown rent had been paid and accepted for many years, to forfeit their interest because of some "fault" of the developer, perhaps way back in the past, is a wholly different matter. This concerns, of course, not only owners, but tenants as well. When counsel for the purchaser was asked during the hearing why the government would wish to do that, the answer was: To extract some premium from the owners for relief against forfeiture. Counsel was unable to point to any precedent where the government has acted in such a harsh and capricious manner.

23. There are scores of Crown leases of Rural Building Lots on the south side of Hong Kong island which contain the height restriction of 35 feet : This, as Liu JA observed in his judgment, is well known to conveyancers - and no less well known to government officials concerned with the development of such lots. The fact that Block C exceeds 35 feet can hardly be concealed. Is the government to make itself a laughing stock, in the eyes of the community, by averring that it has only recently become aware that Block C, as originally constructed, contravened the height restriction in the lease? And how is it to explain to the scores of property owners that their property has, by dint of something that happened many years ago, become forfeited to the government, without compensation?

24. In my judgment the notion that there was a real risk of enforcement in the circumstances of this case is fanciful : Yeung J's conclusion, supported by Liu JA in the Court of Appeal, is unquestionably correct. In a case like this, where as Liu JA said, "concrete proof of Government's knowledge and attitude is ... not easy to find", the court must look at the larger picture. Nazareth VP, with respect, took far too narrow an approach : He thought that, to show good title, the vendors must show "proof of knowledge, i.e. of the breach of covenant" before the government could be taken to have waived the height restriction in this case. As mentioned earlier, on the available material before the judge, it might well have been open to him to make the finding that the Director had, with knowledge of the breach, waived the restriction, or allowed a modification in some way. He did not do so, and took the safer course of asking the broader question : Is there a real risk of enforcement by the government? As to this, there could only be one answer.

Conclusion

25. I would allow the appeal, quash the judgment of the Court of Appeal, restore the judge's order, with costs to the vendors in this Court and below.

Mr Justice Ching PJ :

26. I agree with the judgment of Litton PJ.

Mr Justice Bokhary PJ :

27. In my view, the evidence in this case did not exclude a reasonable possibility of an unwaived breach of condition which gives the Government a right of re-entry. The question is therefore whether, assuming that the Government has that right, there is any real risk that it would actually take the drastic step of enforcing it to the detriment of innocent owners. I entirely agree with Mr Justice Litton PJ that the correct answer is in the negative. It is simply not in the nature of good government to harm innocent people unnecessarily like that. Accordingly it is safe to proceed on the basis that the Government would never do so.

28. The way in which this Court has decided the present case will, I trust, prevent cases of this type arising in future. I agree with Mr Justice Litton PJ that this appeal should be allowed in the terms which he proposes.

Mr Justice Fuad NPJ :

29. I agree with the judgment of Mr Justice Litton PJ.

Lord Hoffmann NPJ :

30. I agree with the judgment of Mr Justice Litton PJ.

Mr Justice Litton PJ :

31. The Court unanimously allows the appeal, quashes the Court of Appeal's judgment, restores Yeung J's order and awards costs to the vendors here and below.

Representation: